Thin cap infrastructure exemption passed

By Hamish Tait & Rhianna Windle

Summer might be over, but New Zealand is set to become a hot destination for foreign infrastructure investors. At least, that is the hope of the Government, with a new infrastructure exemption now included in the thin capitalisation rules. The exemption, included as part of the
Taxation (Annual Rates for 2024–25, Emergency Response, and Remedial Measures) Act 2026 came into force on 1 April 2026 and applies from the 2026/27 income year.

New Zealand’s “standard” thin capitalisation rules limit interest deductions for non-resident controlled entities where New Zealand group debt exceeds 60% of net assets plus interest-bearing debt (unless the worldwide group is more highly geared). The purpose of the rules is to prevent non-residents from artificially loading debt against the New Zealand tax base. However, the rules are a “trade-off”, given their undesirable effects of raising the cost of capital and disincentivising genuine foreign investment in New Zealand. As we’ve previously set out in our June 2025 Tax Alert article this adversely impacts on New Zealand’s ability to correct our infrastructure deficit. Infrastructure projects can commonly be debt funded in excess of the 60% safe harbour threshold.

The good news is the statute book now includes a generous, targeted exemption from the thin capitalisation rules specifically for certain infrastructure investment. Under the new rules, qualifying infrastructure entities should be able to fully deduct interest expenditure on third party, limited recourse debt. The new legislation follows the issue originally being raised with the Government by the private sector, an indication that rules would be implemented in Budget 2025 and consultation in May – June 2025.

Summary of new rules

To qualify for the new exemption:

• The taxpayer must be an eligible infrastructure entity (or an eligible group), which requires carrying on some form of infrastructure business/project, and meeting the asset “value test”; and
• The infrastructure business/project must involve qualifying infrastructure assets; and
• The debt on which the interest arises must be qualifying infrastructure debt.
  

Entities that meet these requirements can choose to apply the exemption by making an annual election with their income tax return, including whether to opt in on an individual or group basis (discussed further below).

1. What is an “eligible infrastructure entity”?

An eligible infrastructure entity is a New Zealand entity which is controlled by foreign investors whose operations are primarily focused on infrastructure. This means:

• The entity must have a principal operation of carrying on a business or project of creating, operating, maintaining or upgrading “qualifying infrastructure assets” that it owns; and
• The entity must meet the asset value test, meaning at least 95% of the total value of all the entity’s assets are either used in or held for the purpose of the infrastructure business. For the purpose of the asset value test, all assets on the balance sheet are considered including deferred tax, goodwill and other intangible assets; and
• The entity must have no permanent establishment outside New Zealand or investment in an overseas entity, nor have any overseas assets (with some exceptions for hedging with an overseas counterparty, or where the overseas asset is minor or overseas for 6 months or less).
  

2. What is a “qualifying infrastructure asset”?

A qualifying infrastructure asset is the core piece of infrastructure which the business/project is required to be centred around. It is defined as a tangible asset located in New Zealand that provides essential services on a “shared-use” basis, whether to the public or another class of users. The exemption contains a non-exhaustive list of examples:

Commercial buildings, industrial buildings and dwellings are excluded, albeit they are included to the extent they are explicitly included on the list (e.g. airport buildings).

3. What is ‘qualifying infrastructure debt’?

Under the new rules, unrestricted interest deductions will only be available on qualifying infrastructure debt applied to the infrastructure business/project. This must be:

• Genuine third-party debt with no equity-like features; and
• Limited recourse debt (meaning the lender only has recourse to the assets or income of the entity including shares/partnership interests – effectively it must be “project debt”).

Infrastructure groups

A group of 100% wholly owned companies can elect to be treated as a single infrastructure group for the purposes of applying the above rules. This is intended to accommodate more complex group structures, including where the infrastructure business/assets are split across several subsidiaries (for example, with some holding the infrastructure assets and others undertaking the supporting activities). It may also be beneficial to consider entities as an infrastructure group in order to meet the asset value test and limited recourse debt requirement.

Deloitte analysis

The new rules demonstrate a willingness by the Government to follow through on altering tax settings to help address the infrastructure deficit that New Zealand is currently facing. Reducing barriers to foreign investment is essential as foreign investors have a critical role to play in providing the large amounts of long-term capital that infrastructure demands.

The exemption also recognises the commercial reality that infrastructure projects are typically highly geared, not to minimise tax, but because they are capital intensive and have long term revenue streams that support genuine debt funding. Limiting interest deductions in these situations, where there is a low risk of artificial debt/equity structuring, has long felt like an overreach of the thin capitalisation rules and the new infrastructure exemption goes some way to addressing that.

Targeted, but more complex, approach

The approach taken also adds complexity in determining whether the exemption applies. Although the list of “qualifying infrastructure assets” is non-exhaustive, there is a level of uncertainty for fringe cases such as retirement villages and social housing. In these borderline cases, taxpayers may need to seek rulings in order to confirm eligibility.

Greenfield vs brownfield

The new rules do improve on the initial options put forward by Officials in the 2025 consultation document by applying to both new and existing infrastructure. This is a welcome feature as it avoids investment decisions being distorted towards greenfield projects (and the reality the investment economics are eroded where the on-sale value is diminished). It also recognises that upgrading and maintaining existing infrastructure is equally important. However, the practical effect of this may be reduced as the rules require entities to own the infrastructure assets (whereas it is common for those carrying out maintenance and operations of infrastructure to instead lease those assets under long-term arrangements).

Strict guardrails for investment structure, eligible debt, and lender security

The new rules are very prescriptive in terms of the requirements for an eligible entity’s legal structure, and its balance sheet. For example, there is an absolute prohibition on having any interest in non-resident entities (meaning for infrastructure groups corporate tax residency will be very important to manage and have good governance for). This means that it will be important for corporate groups to monitor their eligibility on an ongoing basis.

Investors such as managed funds will also need to be conscious of any related entities providing debt funding, as there are strict rules to ensure interest is deductible only in respect of “third party” debt. Any related party debt must be added back in full as income.

There are also prescriptive restrictions in terms of what is a permissible security package able to be provided to lenders. In effect, the eligible debt is limited to true project debt only. Where the broader group is eligible to apply the rule, a broader security package may also be able to be provided. However, this will be essential to work through and plan for as part of structuring any new infrastructure investment, to ensure security provided does not “overstep”. Existing projects should also reflect on their current package if eligibility is seen as important for project economics.

Annual election to opt in

Inland Revenue’s guidance on the new rules is clear that they only apply where an appropriately worded annual election is filed with a tax return, including specifying details of the specific members of the eligible infrastructure group.

Taxpayers should also be conscious that electing part of the group into the rules will remove that asset base from their “normal” thin capitalisation calculations. Therefore, while there appears to be flexibility around the election, taxpayers with “mixed” activity groups will need to proactively consider what options provide the more favourable outcome before filing tax returns.

Therefore it will be important to have good processes in place to ensure taxpayers understand what rules apply to them, and are not inadvertently disadvantaged by compliance mishaps. The “standard” thin capitalisation rules can be more forgiving in that regard.

Does it go far enough?

That said, the targeted nature of the exemption raises an obvious question – should it have gone further? The logic underpinning the exemption does not stop at infrastructure. Where any business is able to secure third party, limited recourse debt from foreign investors, it is hard to argue that the thin capitalisation rules should deny interest deductions as there is clearly a commercially acceptable level of debt. In that sense, by confining the exemption to infrastructure, the new rules have missed an opportunity to refine the thin capitalisation regime to the mischief it intends to target.

Next steps

Infrastructure businesses and investors should assess their eligibility for the exemption as early as possible, as part of planning any project or investment. Given the need for a proactive election, and the potential complexity for less straightforward debt structures or security packages, existing taxpayers should actively consider their position well before filing.

If you would like to discuss the changes and how they might impact your business, please contact your usual Deloitte advisor.